Raising a baby ain’t cheap. From birth to 17, it’s estimated to cost $200,000 to $300,000. Send them to private school, and you can spend another $100,000. University? Add on $50,000+ unless you can deflect those costs back onto junior. As Amanda Morrall reports, forward-planning can go a long way.
Student life has never been easy, but the real stress these days has nothing to do with the schoolwork and everything to do with costs. Today’s grads will finish owing an average of $40,000. About 20% of students will leave the hallowed halls of higher learning with a crushing debt of $50,000 or more. The financial burden has become so tough that many students have given up hope of ever owning their own home. They worry about having enough for retirement and even plan to forego having kids of their own. The New Zealand Union of Students’ Associations, in its 2017 Income & Expenditure Report, calls them “Generation Debt”. Of those surveyed by the NZUSA, 78% said their debt was sufficiently high as to have a “significant impact on their ability to save for retirement.” And 79% said it would impinge on their home-buying ability.
The typical Bachelor’s degree student in 2017 paid $7,385.64 each year for three years ($23,500 over three years) and maxed out the $176.86 a week loan for living costs, with the combined result being a $50,000 debt on graduation with no guarantee of a job at the end. While about 26% were able to do so without borrowing, potentially using the Bank of Mum and Dad instead, a whopping 74% had to borrow. Given housing and consumer debt (one of the highest in the OECD) and looking after ageing parents, the Bank of Mum and Dad is much constrained these days. Today’s expectant parents won’t likely grasp the severity of those future costs and the repercussions of taking on that much debt. A little foresight, however, will go a long way toward reducing the financial pain years down the track.
What you can do?
KiwiSaver can’t be tapped for university, so should only be regarded as a savings strategy to get your child on the property market when they’re ready, or to pad their retirement savings (alongside any investments that you should be encouraging them to make – you could start by teaching them how to invest in facebook, for instance). For parents or grandparents in a position to contribute, it’s a fantastic gift for a child. Regular savings accounts are okay if you want to generate a very modest rate of return over a long time, but they barely keep up with inflation. A more ambitious savings plan is a managed fund. They’re popular overseas, but still not that common in New Zealand ? a legacy, perhaps, of the days when education was free here. These are diversified investments that include growth and income-producing assets (shares and bonds). The rate of return is variable depending on what you’re invested in and the risk of that particular fund. Growth funds in the last 10 years have yielded average rates of return of more than 10%, before tax but after investment fees. That’s a fair sight better than 1.85% p.a. on your typical youth bank savings scheme.
The regularity and amount of your contributions will significantly influence how fast and how much that nest egg grows. The compounding interest will be a bonus on top.
The fees really do add up. Understand what you’re paying in annual fees, and investment fees. Many first-time investors rushing into this market don’t understand that they pay an annual fee PLUS an investment fee. They both add up and will whittle away at your investment.
Prescribed investor rate
As we saw recently in KiwiSaver, many folks still don’t understand that they pay tax on investments that are structured as PIES (Portfolio Investment Entities). Recently, after a computer upgrade, Inland Revenue caught out more than 550,000 for not being in the correct tax bracket. If you open an account for a minor, they’ll be charged at the lowest tax rate. The default setting is usually the highest rate (28%), so make sure you’ve got that setting right.
The amount of your initial deposit and ongoing contributions will depend on your financial position. If you have a figure in mind, reverse engineer the numbers. Over 18 years, if you contribute $40 a week into a growth fund that modestly earns 6.67% pa, you’ll have nearly $50,000 saved up, before fees and tax. At $50 a week, it’s just over $60,000. At $20 a week, you’ll end up with just under $25,000 which is a significant help and head start for any student. Some fund managers don’t charge annual membership fees on kids account, so you’ll save a bit but there’s the investment fee and depending on how much it is, it will chip away at the returns.
Your savings toolkit
- Use the Sorted savings calculator (sorted.org.nz/tools/savingscalculator) or another savings tool to play with the inputs.
- Ask yourself what you can reasonably and sustainably afford. Regular contributions aren’t necessary, but they’ll make all the difference over time, with compound interest working in your favour.
- Do your research when choosing a fund manager, and investigate the fund types.
- SmartInvestor (smartinvestor.sorted.org.nz) is a comparison tool that shows you fees, returns and what your fund is invested in.
Written and researched by Amanda Morrall ? Head of Communications and Education at Simplicity NZ Ltd. Amanda is an experienced media commentator, editor, and author.